Stupid Investment of the Week

A thought for your pennies: they aren't worth hoarding

BOSTON (MarketWatch) -- A penny saved may still be a penny earned, but the real question for investors is whether a penny purchased is actually worth a nickel when it comes time to figure their return on investment.

Plenty of small-time investors are betting that the penny will someday be valued like its larger cousin, and so they are snapping up pennies. Taking pennies out of circulation and collecting them is one thing, but paying a premium to buy pre-1982 pennies for their copper value is another and, for most investors, it would be a Stupid Investment of the Week.

Stupid Investment of the Week highlights the concerns and characteristics that make an investment less than ideal for the average consumer and is written in the hope that spotlighting danger in one situation will make it easier to root out elsewhere.

The case of the penny is compelling, because everyone has pennies and can relate to the most common of coins. Moreover, the math behind the move to buy pennies looks compelling. The real question is one of practicality.

The case for buying pennies goes like this:

The rising price of copper has made it so that the metal content of pre-1982 one-cent pieces is now worth more than the one cent the coin represents, falling somewhere around 1.2 cents. You need roughly 155 of the pre-1982 coins to make a pound of copper. And with copper trading for more than $2 a pound -- and as much as $4 a pound a little over a year ago -- there's definitely some economic merit in hoarding the coins if every $1.55 is worth $2 or more.

But there's a difference between taking pre-1982 pennies out of circulation and putting them in a special place -- the way some people, myself included, have saved the so-called "wheat ear" pennies from the early 1900s for decades -- and plunking down investment dollars to buy pennies at a premium in order to cash in on their value as a commodity.

This is hardly the first time coins have been worth more as a metal than for their cash value. In fact, the same condition applies to nickels today (and some people would say that the five-cent piece is a better investment value). In 1964, the government stopped minting coins that had 90% silver content, which prompted many people (again, myself included) to keep pre-1965 coins. The value of those coins rose dramatically, in part for their metals value and in part for their collectible value.

In 1982, the content of the penny was changed, moving from mostly copper to the copper-clad zinc coin used today. That's why the penny investors want coins minted before 1982.

Two cents worth

James DiGeorgia, editor of the Gold and Energy Advisor newsletter, says the current opportunity is a particularly good one for the small investor, the person who wants a safe investment that includes a floor price -- because the penny will never be worth less than one cent -- and good potential.

"This is an opportunity just like what happened with silver in the 1960s, and it's something that everyone understands and can do," says DiGeorgia, who not only recommends that consumers hoard the pre-1982 pennies but who has suggested they buy $50 bags of the coins. "The value is obvious ... and if a penny from before 1982 becomes worth 10 cents -- and it might -- sooner or later there will be a way to melt it down and get that value out of it."

Later is an important consideration here, because last December the U.S. Mint enacted new rules that made it illegal to melt pennies and nickels. Exporting coins for melting also is illegal. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the U.S. or ship $100 of the coins abroad, but only "for legitimate coinage and numismatic purposes." Violators face up to five years in prison and up to $10,000 in fines, plus the confiscation of coins or metals from melting schemes.

Similar laws were enacted temporarily in the 1960s and '70s to deal with rising metals prices, and the Mint may again ease the law at some point in the future. Until then, however, the penny investor is not looking at a liquid market.

"It's a young market that's not very liquid right now, with probably the best market currently being eBay," says Alec Nevalainen, founder of the Coinflation.com Web site. "While people will be rewarded for hoarding pennies and nickels, that's different from saying you want to make a play on copper right now. If you have real money to invest, go with the stocks [of publicly traded metals companies] rather than buying the pennies directly."

Meltdown

There are several problems with buying pennies for their melt value. For starters, if you buy them by the bag, you'll pay dealer prices, which will inflate your buying price and cut your ultimate selling price. A 50-cent roll of 1981 pennies sells for about $1 today, so you'll spend about $3 to get a pound's worth of copper, which basically eliminates most of the margin that's attracting investors to pennies in the first place.

And if you're buying uncirculated bags of pennies -- as DiGeorgia and others suggest -- you're paying an additional premium to get a collectible, even though your investment premise is the play on metals.

Then there's the problem of storing all of those pennies. A $50 bag of pennies weighs a bit more than 30 pounds. So a $10,000 investment in pennies -- even if it buys just $5,000 worth of coins -- weighs north of 1.5 tons.

"Having four or five shoeboxes of 'wheaties' is one thing, but the cumbersome nature of really investing in pennies for their melt value makes this idea just insane on any larger scale," says Bret Leifer of Bret Leifer Numismatics in Wayland, Mass.

"Most people can't do it in this medium. ... It makes sense when you think of the melt value of the coins, but when you know the law against melting, when you think about how hard it would be to have a real stash of thousands of dollars in pennies, when you think about the dealer costs involved, this just isn't s strategy most people could pursue as a real investment in their portfolio."

Chuck
Jaffe

Chuck Jaffe is a nationally syndicated financial columnist. Follow him on Twitter @ChuckJaffe.

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